nep-mon New Economics Papers
on Monetary Economics
Issue of 2011‒03‒26
25 papers chosen by
Bernd Hayo
Philipps-University Marburg

  1. Does Money Help Predict Inflation? An Empirical Assessment for Central Europe By Roman Horvath; Lubos Komarek; Filip Rozsypal
  2. The optimal inflation rate revisited By Di Bartolomeo Giovanni; Tirelli Patrizio; Acocella Nicola
  3. On the (non-)equivalence of capital adequacy and monetary policy: A response to Cechetti and Kohler By Stan du Plessis; Gideon du Rand
  4. The Japanese Quantitative Easing Policy under Scrutiny: A Time-Varying Parameter Factor-Augmented VAR Model By Moussa, Zakaria
  5. "Financial Markets" By Jorg Bibow
  6. Exchange rate pass-through to consumer prices in Ghana: Evidence from structural vector auto-regression By Sanusi, Aliyu Rafindadi
  7. A Bayesian approach to optimal monetary policy with parameter and model uncertainty By Cogley, Timothy; de Paoli, Bianca; Matthes, Christian; Nikolov, Kalin; Yates, Tony
  8. The gains from delegation revisited: price-level targeting, speed-limit and interest rate smoothing policies By Blake, Andy; Kirsanova, Tatiana; Yates, Tony
  9. US Infl ation and infl ation uncertainty in a historical perspective: The impact of recessions By Don Bredin; Stilianos Fountas
  10. Policymakers' Votes and Predictability of Monetary Policy By Andrei Sirchenko
  11. "Keynes after 75 Years: Rethinking Money as a Public Monopoly" By L. Randall Wray
  12. Money, Financial Stability and Efficiency By Franklin Allen; Elena Carletti; Douglas Gale
  13. Central bank transparency and the crowding out of private information in an experimental asset market By Menno Middeldorp; Stephanie Rosenkranz
  14. Money cycles By Andrew Clausen; Carlo Strub
  15. Inflation expectations, real rates, and risk premia: evidence from inflation swaps By Joseph G. Haubrich; George Pennacchi; Peter Ritchken
  16. The Optimum Currency Area. Is the Euro Zone an Optimum Currency Area? By Geza, Paula; Giurca Vasilescu, Laura
  17. Price-level targeting versus inflation targeting over the long-term By Hatcher, Michael C.
  18. Why had the Money Market Approach been irrelevant in explaining inflation in Azerbaijan during the rapid economic growth period? By Fakhri , Hasanov; Khudayar , Hasanli
  19. Leaning Against Boom-Bust Cycles in Credit and Housing Prices By Luisa Lambertini; Caterina Mendicino; Maria Teresa Punzi
  20. Central Banks' Voting Records and Future Policy By Roman Horvath; Katerina Smidkova; Jan Zapal
  21. Do Unit Labor Cost Drive Inflation in the Euro Area? By Sandra Tatierska
  22. The Euro Changeover and Price Adjustments in Italy By Guglielmo Maria Caporale; Alessandro Girardi; Marco Ventura
  23. Interest Rates After The Credit Crunch: Multiple-Curve Vanilla Derivatives and SABR By Marco Bianchetti; Mattia Carlicchi
  24. Spatial Propagation of Macroeconomic Shocks in Europe By Romain Houssa
  25. Modelling the Currency in Circulation for the State of Qatar. By Balli, Faruk; Elsamadisy, Elsayed

  1. By: Roman Horvath; Lubos Komarek; Filip Rozsypal
    Abstract: This paper investigates the predictive ability of money for future inflation in the Czech Republic, Hungary, Poland, and Slovakia. We construct monetary indicators similar to those the ECB regularly uses for monetary analysis. We find some in-sample evidence that money matters for future inflation at the policy horizons that central banks typically focus on, but our pseudo out-of-sample forecasting exercise shows that money does not in general improve the inflation forecasts vis-à-vis some benchmark models, such as the autoregressive process. Since at least some models containing money improve the inflation forecasts in certain periods, we argue that money still serves as a useful cross-check for monetary policy analysis.
    Keywords: Central Europe, forecasting, inflation, money.
    JEL: E41 E47 E52
    Date: 2010–12
  2. By: Di Bartolomeo Giovanni; Tirelli Patrizio; Acocella Nicola
    Abstract: We challenge the widely held belief that New Keynesian models cannot predict an optimal positive inflation rate. In fact we find that even for the US economy, characterized by relatively small government size, optimal trend inflation is justified by the Phelps argument that the inflation tax should be part of an optimal (distortionary) taxation scheme. This mainly happens because, unlike standard calibrations of public expenditures that focus on public consumption-to-GDP ratios, we also consider the diverse, highly distortionary effect of public transfers to households. Our prediction of the optimal inflation rate is broadly consistent with recent estimates of the Fed inflation target. We also contradict the view that the Ramsey-optimal policy should minimize inflation volatility over the business cycle and induce near-random walk dynamics of public debt in the long run. In fact optimal fiscal and monetary policies should stabilize long-run debt-to-GDP ratios in order to limit tax (and inflation) distortions in steady state. This latter result is strikingly similar to policy analyses in the aftermath of the 2008 financial crisis.
    Keywords: Trend inflation, monetary and fiscal policy, Ramsey plan
    JEL: E52 E58 J51 E24
    Date: 2011–03
  3. By: Stan du Plessis (Department of Economics, University of Stellenbosch); Gideon du Rand (Department of Economics, University of Stellenbosch)
    Abstract: The instrument problem in monetary policy is back on the agenda. Until recently interest rate policy was widely thought to be sufficient for the attainment of appropriate monetary policy goals. No longer. In the wake of the international financial crisis there is much pressure on monetary authorities to incorporate the goal of financial stability more explicitly in policy. This requires an expansion of the instruments typically used by central banks. Cechetti and Kohler (2010) recently considered this new version of the instrument problem in monetary policy by analysing the distinct role and potential for co-ordinating (i) interest rates and (ii) capital adequacy requirements. In this paper we connect this modern debate with an earlier version of the instrument problem, famously discussed by Poole (1970). Then, as now (we claim), the main message of the analysis is the non-equivalence of these instruments and the structural features of the economy on the basis of which one would prefer a particular combination of these instruments. These results are demonstrated with a set of simulations. We also offer a theoretical criticism of the modelling approach used by Cechetti and Kohler (2010).
    Keywords: Monetary policy, Instrument problem, Interest rates, Alternative monetary policy instruments, Balance sheet operations, Policy co-ordination
    JEL: E52 E58 E61
    Date: 2011
  4. By: Moussa, Zakaria
    Abstract: Interest rates in several countries have recently been decreased to exceptionally low levels and a Quantitative Easing Monetary Policy (QEMP) has been adopted by most major central banks. In this context this paper is very actual, as it sheds some light on the effectiveness of the Japanese use of QEMP, which is the only experience we can learn from. This paper employs a Time Varying Parameters Factor-Augmented VAR (TVP-FAVAR) model to analyse monetary policy shocks in Japan. This model allows us to explore the effect of QEMP on a large number of variables. Our analysis delivers four main results. First, unsurprisingly, our results suggest that the best model to specify the Japanese monetary policy during the two last decades is a model where all of parameters vary over time. Second, the effect of QEMP on activity and prices is stronger than previously found. In particular, we find a significant price reaction to a monetary policy shock. Third, in contrast to previous work, there is a detectable efficiency of the portfolio-rebalancing channel, which could have a role in transmitting the monetary policy shocks. Fourth, while the policy commitment succeeds in controlling private and business expectations, these effects are not transmitted to the long-end of the yield curve.
    Keywords: Time varying parameters; Factor-Augmented VAR; Japan; Quantitative Easing; Transmission channels
    JEL: C32 E5 C11
    Date: 2010–10–05
  5. By: Jorg Bibow
    Abstract: This paper provides a brief exposition of financial markets in Post Keynesian economics. Inspired by John Maynard Keynes's path-breaking insights into the role of liquidity and finance in "monetary production economies," Post Keynesian economics offers a refreshing alternative to mainstream (mis)conceptions in this area. We highlight the importance of liquidity-as provided by the financial system—to the proper functioning of real world economies under fundamental uncertainty, contrasting starkly with the fictitious modeling world of neo-Walrasian exchange economies. The mainstream vision of well-behaved financial markets, channeling saving flows from savers to investors while anchored by fundamentals, complements a notion of money as an arbitrary numeraire and mere convenience, facilitating exchange but otherwise "neutral." From a Post Keynesian perspective, money and finance are nonneutral but condition and shape real economic performance. It takes public policy to anchor asset prices and secure financial stability, with the central bank as the key public policy tool.
    Keywords: Financial Markets; Liquidity; Uncertainty; Rate of Interest; Instability; Central Banking
    JEL: B31 E44 E50
    Date: 2011–03
  6. By: Sanusi, Aliyu Rafindadi
    Abstract: This paper develops a Structural Vector Autoregression (SVAR) model for the Ghanaian economy to estimate the pass-through effects of exchange rate changes to consumer prices. The model incorporates the special features of the Ghanaian economy, especially its dependence on foreign aid and primary commodity exports for foreign exchange earnings. The findings show that the pass-through to consumer prices, although incomplete, is substantially large. This suggests that exchange rate depreciation is a potentially important source of inflation in Ghana. Using variance decomposition analyses, it is found that monetary expansion has been more important in explaining Ghana’s actual inflationary process than the exchange rate depreciation. One policy implication of these findings is that policies that aim at lowering inflation must focus on monetary and exchange rate stability.
    Keywords: Exchange Rate Pass-Through; Inflation; Structural Vector-Autoregression; Foreign Aid; Ghana
    JEL: E31 F41 F31
    Date: 2010–06
  7. By: Cogley, Timothy (New York University); de Paoli, Bianca (Bank of England); Matthes, Christian (Universitat Pompeu Fabra); Nikolov, Kalin (European Central Bank); Yates, Tony (Bank of England)
    Abstract: This paper undertakes a Bayesian analysis of optimal monetary policy for the United Kingdom. We estimate a suite of monetary policy models that include both forward and backward-looking representations as well as large and small-scale models. We find an optimal simple Taylor-type rule that accounts for both model and parameter uncertainty. For the most part, backward-looking models are highly fault tolerant with respect to policies optimised for forward-looking representations, while forward-looking models have low fault tolerance with respect to policies optimised for backward-looking representations. In addition, backward-looking models often have lower posterior probabilities than forward-looking models. Bayesian policies therefore have characteristics suitable for inflation and output stabilisation in forward-looking models.
    Date: 2011–03–02
  8. By: Blake, Andy (Bank of England); Kirsanova, Tatiana (University of Exeter); Yates, Tony (Bank of England)
    Abstract: A commonly held view is that the life of a monetary policy maker forced to operate under discretion can be improved by the authorities delegating monetary policy objectives that are different from the social welfare function (including interest rate smoothing, price-level targeting and speed-limit objectives). We show that this holds with much less generality than previously realised. The reason is that in monetary policy models with capital accumulation (or similar variables) there may be multiple equilibria under discretion. Delegating modified objectives to the monetary policy maker does not change this. We find that the best equilbria under delegation are sometimes inferior to the worse ones without delegation. In general the welfare benefits of schemes like price-level targeting must be regarded as ambiguous.
    Date: 2011–03–15
  9. By: Don Bredin (University College Dublin); Stilianos Fountas (University of Macedonia)
    Abstract: We use over two hundred years of US inflation data to examine the impact of inflation uncertainty on inflation. An analysis of the full period without allowing for various regimes shows no impact of uncertainty on inflation. However, once we distinguish between recessions and non recessions, we find that inflation uncertainty has a negative effect on inflation only in recession times, thus providing support to the Holland hypothesis.
    Keywords: asymmetric GARCH, recession, inflation uncertainty
    JEL: C22 E31
    Date: 2011–03–11
  10. By: Andrei Sirchenko
    Abstract: The National Bank of Poland does not publish the Monetary Policy Council's voting records before the subsequent policy meeting. Using real-time data, this paper shows that a prompter release of the voting records could improve the predictability of policy decisions. The voting patterns reveal strong and robust predictive content even after controlling for policy bias and responses to in.ation, real activity, exchange rates and financial market information. They contain information not embedded in the spreads and moves in the market interest rates, nor in the explicit forecasts of the next policy decision made by market analysts in Reuters surveys. Moreover, the direction of policymakers' dissent explains the direction of analysts.forecast bias. These findings are based on the voting patterns only, without the knowledge of policymakers' names.
    Keywords: monetary policy; predictability; policy interest rate; voting records; real-time data
    JEL: D70 E52 E58
    Date: 2011
  11. By: L. Randall Wray
    Abstract: In this paper I first provide an overview of alternative approaches to money, contrasting the orthodox approach, in which money is neutral, at least in the long run; and the Marx-Veblen-Keynes approach, or the monetary theory of production. I then focus in more detail on two main categories: the orthodox approach that views money as an efficiency-enhancing innovation of markets, and the Chartalist approach that defines money as a creature of the state. As the state's "creature," money should be seen as a public monopoly. I then move on to the implications of viewing money as a public monopoly and link that view back to Keynes, arguing that extending Keynes along these lines would bring his theory up to date.
    Keywords: Money; Public Monopoly; Monetary Theory of Production; Keynes; Marx; Veblen; Knapp; Chartalism
    JEL: B14 B15 B22 B52 E12 E40 E42 E50 E51 E52 G14 G21 H1 H3 H4 H44
    Date: 2011–03
  12. By: Franklin Allen; Elena Carletti; Douglas Gale
    Abstract: Most analyses of banking crises assume that banks use real contracts. However, in practice contracts are nominal and this is what is assumed here. We consider a standard banking model with aggregate return risk, aggregate liquidity risk and idiosyncratic liquidity shocks. We show that, with non-contingent nominal deposit contracts, the first-best efficient allocation can be achieved in a decentralized banking system. What is required is that the central bank accommodates the demands of the private sector for fiat money. Variations in the price level allow full sharing of aggregate risks. An interbank market allows the sharing of idiosyncratic liquidity risk. In contrast, idiosyncratic (bank-specific) return risks cannot be shared using monetary policy alone; real transfers are needed.
    Date: 2011
  13. By: Menno Middeldorp; Stephanie Rosenkranz
    Abstract: Central banks have become increasingly communicative. An important reason is that democratic societies expect more transparency from public institutions. Central bankers, based on empirical research, also believe that sharing information has economic benefits. Communication is seen as a way to improve the predictability of monetary policy, thereby lowering financial market volatility and contributing to a more stable economy. However, a potential side-effect of providing costless public information is that market participants may be less inclined to invest in private information. Theoretical results suggest that this can hamper the ability of markets to predict future monetary policy. We test this in a laboratory asset market. Crowding out of information acquisition does indeed take place, but only where it is most pronounced does the predictive ability of the market deteriorate. Notable features of the experiment include a complex setup based directly on the theoretical model and the calibration of experimental parameters using empirical measurements.
    Keywords: Banks and banking, Central ; Monetary policy ; Disclosure of information
    Date: 2011
  14. By: Andrew Clausen; Carlo Strub
    Abstract: Classical models of money are typically based on a competitive market without capital or credit. They then impose exogenous timing structures, market participation constraints, or cash-in-advance constraints to make money essential. We present a simple model without credit where money arises from a fixed cost of production. This leads to a rich equilibrium structure. Agents avoid the fixed cost by taking vacations and the trade between workers and vacationers is supported by money. We show that agents acquire and spend money in cycles of finite length. Throughout such a “money cycle,” agents decrease their consumption which we interpret as the hot potato effect of inflation. We give an example where money holdings do not decrease monotonically throughout the money cycle. Optimal monetary policy is given by the Friedman rule, which supports efficient equilibria. Thus, monetary policy provides an alternative to lotteries for smoothing out non-convexities.
    Date: 2011–03
  15. By: Joseph G. Haubrich; George Pennacchi; Peter Ritchken
    Abstract: This paper develops a model of the term structures of nominal and real interest rates driven by state variables representing the short-term real interest rate, expected inflation, inflation’s central tendency, and four volatility factors that follow GARCH processes. We derive analytical solutions for nominal bond yields, yields on inflation-indexed bonds that have an indexation lag, and the term structure of expected inflation. Unlike prior studies, the model’s parameters are estimated using data on inflation swap rates, as well as nominal yields and survey forecasts of inflation. The volatility state variables fully determine bonds’ time-varying risk premia and allow for stochastic volatility and correlation between bond yields, yet they have small effects on the cross section of nominal yields. Allowing for time-varying volatility is particularly important for real interest rate and expected inflation processes, but long-horizon real and inflation risk premia are relatively stable. Comparing our model prices of inflation-indexed bonds to those of Treasury Inflation Protected Securities (TIPS) suggests that TIPS were significantly underpriced prior to 2004 and again during the 2008-2009 financial crisis.
    Keywords: Inflation (Finance) ; Interest rates ; Asset pricing
    Date: 2011
  16. By: Geza, Paula; Giurca Vasilescu, Laura
    Abstract: Although analyzed in terms of criteria for defining an optimum currency area, we could appreciate that EU fulfils certain criteria established within the theory of the optimum currency area. But in comparison with USA or Canada, the EU has less premises to effectively become such an area. The Economic and Monetary Union considered, from a certain point of view, the most ambitious and risky project of the European construction, is the result of a fundamental political decision within a powerful economic component. Despite the statute of sub-optimum currency area, there are still a series of arguments, both supportive and critical, for the settlement of an Economic and Monetary Union within the European space.
    Keywords: Optimum Currency Area; Monetary Integration; Currency; Economic and Monetary Union
    JEL: E42 F36
    Date: 2011–03–17
  17. By: Hatcher, Michael C. (Cardiff Business School)
    Abstract: This paper investigates the long-term impact of price-level targeting on social welfare in an overlapping generations model in which the young save for old age by investing in productive capital and indexed and nominal government bonds. A key feature of the model is that the extent of bond indexation is determined endogenously in response to monetary policy as part of an optimal commitment Ramsey policy. Due to the absence of base-level drift under price-level targeting, long-term inflation risk is reduced by an order of magnitude compared to inflation targeting. Consequently, real bond returns are stabilised somewhat, and consumption volatility for old generations is reduced by around 15 per cent. The baseline welfare gain from price- level targeting is equivalent to a permanent increase in aggregate consumption of only 0.01 per cent, but this estimate is strongly sensitive on the upside.
    Keywords: inflation targeting; price-level targeting; optimal indexation; government bonds
    JEL: E52 E58
    Date: 2011–03
  18. By: Fakhri , Hasanov; Khudayar , Hasanli
    Abstract: The study examines whether inflation process can be explained within the framework of the Money Market Approach in the third stage of economic development of Azerbaijan economy covering 2004-2008. By employing dynamic modeling study concludes that the Money Market Approach has not been relevant for explaining Azerbaijani inflation. Because Azerbaijan, a resource rich small open economy in transition processes, has some stylized facts which are important to take into account in the analysis of the inflation. Since the Money Market Approach seems irrelevant one, the paper puts forward application of other alternative explanations for Azerbaijani inflation in the future. In this regard analyzing inflation in the context of resource dependence seems one of the relevant approaches due to high price increases mainly sourced from oil revenues.
    Keywords: Inflation rate; Money Market Approach; Transition economy; Resource Abundance; Oil and Non-oil Sectors; Econometric modeling; Azerbaijan
    JEL: P24 Q33 C22
    Date: 2011–02
  19. By: Luisa Lambertini (Chair of International Finance, Ecole Polytechnique Federale de Lausanne (EPFL), Switzerland); Caterina Mendicino; Maria Teresa Punzi
    Abstract: This paper studies the potential gains of monetary and macro-prudential policies that lean against news-driven boom-bust cycles in housing prices and credit generated by expectations of future macroeconomic developments. First, we find no trade-off between the traditional goals of monetary policy and leaning against boom-bust cycles. An interest-rate rule that completely stabilizes inflation is not optimal. In contrast, an interest-rate rule that responds to financial variables mitigates macroeconomic and financial cycles and is welfare improving relative to the estimated rule. Second, counter-cyclical Loan-to-Value rules that respond to credit growth do not increase inflation volatility and are more effective in maintaining a stable provision of financial intermediation than interest-rate rules that respond to financial variables. Heterogeneity in the welfare implications for borrowers and savers make it difficult to rank the two policy frameworks.
    Keywords: Expectations-driven cycles, Macro-prudential policy, Monetary policy, Welfare analysis
    JEL: E32 E44 E52
    Date: 2011–03
  20. By: Roman Horvath; Katerina Smidkova; Jan Zapal
    Abstract: We assess whether the voting records of central bank boards are informative about future monetary policy. First, we specify a theoretical model of central bank board decision-making and simulate the voting outcomes. Three different versions of model are estimated with simulated data: 1) democratic, 2) consensual and 3) opportunistic. These versions differ in the extent to which the chairman and other board members exchange information prior to the voting. The model shows that the voting pattern is informative about future monetary policy provided that the signals about the optimal policy rate are noisy and that there is sufficient independence in voting across the board members, which is in line with the democratic version. Next, the model predictions are tested on real data on six countries (the Czech Republic, Hungary, Poland, Sweden, the United Kingdom and the United States). Subject to various sensitivity tests, it is found that the democratic version of the model corresponds best to the real data and that in all countries the voting records are informative about future monetary policy, making a case for publishing the records.
    Keywords: Collective decision-making, monetary policy, transparency, voting record.
    JEL: C78 D78 E52 E58
    Date: 2010–12
  21. By: Sandra Tatierska (National Bank of Slovakia, Research Departmen)
    Abstract: The purpose of this study is to analyze the relationship between unit labor costs and inflation. We estimate an optimal price path model based on a New Keynesian Phillips Curve for eleven euro area countries individually, under the assumption that unit labor costs are proportional to marginal costs. We seek such a model which minimizes the distance between fitted and actual price level fluctuations, with parameters that satisfy theoretical restrictions. The econometric methodology used is a two-step approach method. Estimates show that in eight of the eleven euro area countries there is a plausible relationship between unit labor costs and price level dynamics. The average time needed to adjust prices in line with movements in unit labor costs is estimated to be around eight months. In the case of Slovakia the results indicate rather flexible prices.
    Keywords: inflation, unit labor costs, NKPC, euro area, VAR
    JEL: C22 E12 E3 J3
    Date: 2010–12
  22. By: Guglielmo Maria Caporale; Alessandro Girardi; Marco Ventura
    Abstract: By estimating a staggered price model over the period 1980q1-2010q2, this paper documents that, after the euro changeover, Italian retailers have increased the number of price adjustments, which has translated into a higher inflation rate, with a detrimental effect on the competitiveness of the Italian economy.
    Keywords: Euro changeover, staggered price adjustments, inflation
    JEL: C22 E31
    Date: 2011
  23. By: Marco Bianchetti; Mattia Carlicchi
    Abstract: We present a quantitative study of the markets and models evolution across the credit crunch crisis. In particular, we focus on the fixed income market and we analyze the most relevant empirical evidences regarding the divergences between Libor and OIS rates, the explosion of Basis Swaps spreads, and the diffusion of collateral agreements and CSA-discounting, in terms of credit and liquidity effects. We also review the new modern pricing approach prevailing among practitioners, based on multiple yield curves reflecting the different credit and liquidity risk of Libor rates with different tenors and the overnight discounting of cash flows originated by derivative transactions under collateral with daily margination. We report the classical and modern no-arbitrage pricing formulas for plain vanilla interest rate derivatives, and the multiple-curve generalization of the market standard SABR model with stochastic volatility. We then report the results of an empirical analysis on recent market data comparing pre- and post-credit crunch pricing methodologies and showing the transition of the market practice from the classical to the modern framework. In particular, we prove that the market of Interest Rate Swaps has abandoned since March 2010 the classical Single-Curve pricing approach, typical of the pre-credit crunch interest rate world, and has adopted the modern Multiple-Curve CSA approach, thus incorporating credit and liquidity effects into market prices. The same analysis is applied to European Caps/Floors, finding that the full transition to the modern Multiple-Curve CSA approach has retarded up to August 2010. Finally, we show the robustness of the SABR model to calibrate the market volatility smile coherently with the new market evidences.
    Date: 2011–03
  24. By: Romain Houssa (Center for Research in the Economics of Development, University of Namur)
    Abstract: This paper develops a Spatial Vector Auto-Regressive (SpVAR) model that takes into account both the time and the spatial dimensions of economic shocks. We apply this framework to analyze the propagation through space and time of macroeconomic (inflation, output gap and interest rate) shocks in Europe. The empirical analysis identifies an economically and statistically significant spatial component in the transmission of macroeconomic shocks in Europe.
    Keywords: Macroeconomics, Spatial Models, VAR
    JEL: E3 E43 E52 C51 C33
    Date: 2010–04
  25. By: Balli, Faruk; Elsamadisy, Elsayed
    Abstract: The main concern of this report is to model the daily and weekly forecasting of the currency in circulation (CIC) for the State of Qatar. The time series of daily observations of the CIC is expected to display marked seasonal and cyclical patterns daily, weekly or even monthly basis. We have compared the forecasting performance of typical linear forecasting models, namely the regression model and the seasonal ARIMA model using daily data. We found that seasonal ARIMA model performs better in forecasting CIC, particularly for short-term horizons.
    Keywords: Currency in Circulation; Forecasting; Seasonal ARIMA
    JEL: C32 C53
    Date: 2010–01–15

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